What does the Freetrade community think about payment for deal flow? How much of the content does not apply to the UK because of pricing/size/economics? I’m a n00b in this area but curious to learn more from the people here. Any opinions?
Payment for order flow (POF) is banned in the UK as of 2012 by regulators citing conflict of interest:
POF is basically where a broker, lets say Hargreaves Lansdown, takes a client’s orders, and sells them to a market maker , lets say the london stock exchange (technically the LSE isnt a market maker, they just work with them, but lets keep things simple) for a fee. LSE/market makers then pocket the difference between the buying and selling price ( the “spread”) on that client’s order. Very shady business.
“there is a controversy about Robinhood’s use of payment for orderflow. I find this controversy baffling and annoying because it is absolutely crystal clear that this is good for you: Robinhood charges high-frequency traders for the privilege of selling you stock at better than the market price, and then uses the fees it collects from them to let you trade for free. If you went to a regular broker and demanded that your order be routed to the stock exchange with no payment for order flow, (1) you would pay a commission and (2) you would get a worse price for the stock.”
Which obviously has no relevance in jurisdictions where POF is illegal!
That’s essentially the opinion of Patrick in that blog post as well. The fact that the broker makes money from it doesn’t mean it’s not better for consumers.
Even though Robinhood makes the majority of their revenue from this now - I wonder if that’s their long-term plan. People accuse them of it, but it might just be a stopgap measure to get more revenue now while they grow, before they reach a scale for a freemium model to make more sense.
@anon1435622 Any link to evidence that it’s illegal in the UK?
Slightly on a tangent, but seems like commission free brokers are popping up left right and centre at the moment.
Evarvest partially successfully crowdfunded on Seedrs recently, and now StockTwits that they will soon be launching a Trade App for commission free brokerage, albeit in the US only. Seems like the market is definitely growing globally.
This could be very interesting for the US market and eventually for Europe. Also for those competitors starting up and allowing this I think they’re treading in thin ice. Freetrade is the way to go and should roll the product out ASAP to promote a freemium model over this PFOF.